Portfolio optimization system that simultaniously supports multiple tax-exempt, tax-deferred and taxable accounts

Abstract

The disclosed embodiments relate to a system that optimizes an investment portfolio across multiple investment accounts with differing tax treatments. During operation, the system receives a call to optimize the portfolio for an investor. First, the system solves for a target asset allocation that specifies a desired allocation for investments in each account type in the portfolio across different asset classes or factor exposures. Next, the system performs a portfolio optimization operation to determine the optimal allocations across different investment options for all accounts in the portfolio with the objectives of maximizing expected after-tax alpha for the portfolio, minimizing a tracking error between the portfolio and the target asset allocation, minimizing taxes on realized capital gains, both now and in the future (for taxable accounts), and minimizing trade costs. Finally, the system generates a set of trading instructions to produce the optimal allocation from a current allocation for the portfolio.

What is claimed is: 
     
         1 . A method for using a portfolio optimization system to optimize an investment portfolio across multiple investment accounts with differing tax treatments, comprising:
 receiving a call to optimize the portfolio for an investor;   solving for a target asset allocation that specifies a desired allocation for investments in each account type in the portfolio across different asset classes and/or factor exposures;   performing a portfolio optimization operation to determine the optimal allocations across different investment options for all accounts in the portfolio with one or more of the objectives of maximizing expected after-tax alpha for the portfolio, minimizing a tracking error between the portfolio and the target asset allocation, minimizing taxes on realized capital gains, both now and in the future for taxable accounts, and minimizing trade costs; and   generating a set of trading instructions to produce the optimal allocation from a current allocation for the portfolio.   
     
     
         2 . The method of  claim 1 , wherein the method further comprises automatically executing the set of trading instructions to produce the optimal allocation. 
     
     
         3 . The method of  claim 1 , wherein the method further comprises receiving an approval for the set of trading instructions from the investor (or the investor's advisor) prior to executing the set of trading instructions. 
     
     
         4 . The method of  claim 1 , wherein the call is triggered by a scheduler on a periodic basis or in response to a non-periodic event. 
     
     
         5 . The method of  claim 1 , wherein the call is received through an application programming interface (API) from a system belonging to an investment company, a financial advisor firm, a bank and/or a retirement account recordkeeper. 
     
     
         6 . The method of  claim 1 , wherein the call does not include any personally identifiable information (PII) of the investor and the portfolio optimization operation does not consider any PII of the investor. 
     
     
         7 . The method of  claim 1 , wherein the optimization operation is performed by a stateless core optimizer engine. 
     
     
         8 . The method of  claim 1 , wherein the multiple investment accounts with differing tax treatments include comprise different account types, including one or more of the following:
 a tax-exempt account;   a tax-deferred account; and   a taxable account.   
     
     
         9 . The method of  claim 1 , wherein the portfolio optimization system incorporates a cash flow approach, which considers cash flows related to taxes and trade costs during an expected holding period for an investment and at the end of the expected holding period. 
     
     
         10 . The method of  claim 1 , wherein the portfolio optimization system makes use of a tax-aware alpha value for each investment option. 
     
     
         11 . The method of  claim 1 , wherein the portfolio optimization system recursively considers possible tax-loss harvesting operations based on individual tax lots in the current allocation for the portfolio to minimize taxes on capital gains. 
     
     
         12 . The method of  claim 1 , wherein the portfolio optimization system decomposes the target asset allocation into a set of separate account-type specific allocation targets, and while doing so locates tax-inefficient investment options in tax-privileged accounts, and tax-efficient investment options in taxable accounts. 
     
     
         13 . The method of  claim 1 , wherein the portfolio optimization system considers individual tax brackets and associated tax rates for the investor. 
     
     
         14 . The method of  claim 1 , wherein the portfolio optimization system considers trading costs for each investment option. 
     
     
         15 . The method of  claim 1 , wherein the portfolio optimization system considers non-pecuniary investment preferences of the investor. 
     
     
         16 . The method of  claim 1 , wherein the portfolio optimization system includes a desired withdrawal amount to produce an optimal allocation after the desired withdrawal amount is taken from the portfolio. 
     
     
         17 . The method of  claim 1 , wherein the portfolio optimization system facilitates an account rollover by considering a possible rollover of a retirement account to another type of retirement account. 
     
     
         18 . The method of  claim 1 , wherein the portfolio optimization system uses an asset class covariance matrix to compute an expected variance for the optimal allocation. 
     
     
         19 . The method of  claim 1 , wherein the multiple accounts considered by the portfolio optimization system can be distributed across multiple investment companies and/or retirement account recordkeepers. 
     
     
         20 . The method of  claim 1 , wherein the investment options considered by the portfolio optimization system include one or more of the following:
 an equity security;   a fixed-income security;   a real estate investment trust (REIT) security;   a money market fund;   an index fund;   an exchange-traded fund (ETF);   a separately managed account;   an investment fund associated with a specific fund manager; and   cash.   
     
     
         21 . A non-transitory computer-readable storage medium storing instructions that when executed by a computer cause the computer to perform a method for using a portfolio optimization system to optimize an investment portfolio across multiple investment accounts with differing tax treatments, the method comprising:
 receiving a call to optimize the portfolio for an investor;   solving for a target asset allocation that specifies a desired allocation for investments in each account type in the portfolio across different asset classes and/or factor exposures;   performing a portfolio optimization operation to determine the optimal allocations across different investment options for all accounts in the portfolio with one or more of the objectives of maximizing expected after-tax alpha for the portfolio, minimizing a tracking error between the portfolio and the target asset allocation, minimizing taxes on realized capital gains, both now and in the future for taxable accounts, and minimizing trade costs; and   generating a set of trading instructions to produce the optimal allocation from a current allocation for the portfolio.   
     
     
         22 . The non-transitory computer-readable storage medium of  claim 21 , wherein the method further comprises automatically executing the set of trading instructions to produce the optimal allocation. 
     
     
         23 . The non-transitory computer-readable storage medium of  claim 21 , wherein the method further comprises receiving an approval for the set of trading instructions from the investor (or the investor's advisor) prior to executing the set of trading instructions. 
     
     
         24 . The non-transitory computer-readable storage medium of  claim 21 , wherein the call is triggered by a scheduler on a periodic basis or in response to a non-periodic event. 
     
     
         25 . The non-transitory computer-readable storage medium of  claim 21 , wherein the call is received through an application programming interface (API) from a system belonging to an investment company, a financial advisor firm, a bank and/or a retirement account recordkeeper. 
     
     
         26 . The non-transitory computer-readable storage medium of  claim 21 , wherein the call does not include any personally identifiable information (PII) of the investor and the portfolio optimization system does not consider any PII of the investor. 
     
     
         27 . The non-transitory computer-readable storage medium of  claim 21 , wherein the optimization operation is performed by a stateless core optimizer engine. 
     
     
         28 . The non-transitory computer-readable storage medium of  claim 21 , wherein the multiple investment accounts with differing tax treatments comprise different account types, including one or more of the following:
 a tax-exempt account;   a tax-deferred account; and   a taxable account.   
     
     
         29 . The non-transitory computer-readable storage medium of  claim 21 , wherein the portfolio optimization system incorporates a cash flow approach, which considers cash flows related to taxes and trade costs during an expected holding period for an investment and at the end of the expected holding period. 
     
     
         30 . The non-transitory computer-readable storage medium of  claim 21 , wherein the portfolio optimization system makes use of a tax-aware alpha value for each investment option. 
     
     
         31 . The non-transitory computer-readable storage medium of  claim 21 , wherein the portfolio optimization system recursively considers possible tax-loss harvesting operations based on individual tax lots in the current allocation for the portfolio to minimize taxes on capital gains 
     
     
         32 . The non-transitory computer-readable storage medium of  claim 21 , wherein the portfolio optimization system decomposes the target asset allocation into a set of separate account-type specific allocation targets, and while doing so locates tax-inefficient investment options in tax-privileged accounts, and tax-efficient investment options in taxable accounts. 
     
     
         33 . The non-transitory computer-readable storage medium of  claim 21 , wherein the portfolio optimization system facilitates an account rollover by considering a possible rollover of a retirement account to another type of retirement account. 
     
     
         34 . A system that optimizes an investment portfolio across multiple investment accounts with differing tax treatments, comprising:
 at least one processor and at least one associated memory; and   an optimization that executes on the at least one processor, wherein the optimization mechanism:   receives a call to optimize the portfolio for an investor;   solves for a target asset allocation that specifies a desired allocation for investments in each account type in the portfolio across different asset classes and/or factor exposures;   performs a portfolio optimization operation to determine the optimal allocations across different investment options for all accounts in the portfolio with one or more of the objectives of maximizing expected after-tax alpha for the portfolio, minimizing a tracking error between the portfolio and the target asset allocation, minimizing taxes on realized capital gains, both now and in the future for taxable accounts, and minimizing trade costs; and   generates a set of trading instructions to produce the optimal allocation from a current allocation for the portfolio.